Boston equity firm invests $134.7 million in Sterling

Thomas H. Lee Partners, a Boston private equity firm, will invest $134.7 million in struggling Sterling Financial Corp. as part of the Spokane bank-holding company’s ongoing effort to raise enough money to meet requirements imposed by federal regulators.

As part of the recapitalization effort, Sterling also announced it will execute a separate stock exchange deal with the U.S. Treasury to convert about $303 million in preferred shares held by the Treasury to common stock worth about $76 million.

That amounts to a significant discount, with the Treasury accepting a conversion of its investment through the Troubled Asset Relief Program to just 20 cents on the dollar, a company news release noted.

The two agreements were described as linked, with the Treasury exchange depending on Sterling formalizing its deal for the $134.7 million investment from equity firm THL.

Eventually, Sterling officials say they need to raise an additional $585 million to meet the required capitalization that will keep the Spokane company independent.

Sterling Financial is the second-largest bank company in Washington and is parent to Sterling Savings Bank and Golf Savings Bank. It has about 650 Spokane-area workers, a bank spokeswoman said.

THL’s investment will provide the longtime private-equity firm a 16.6 percent stake in Sterling. THL has an option to increase that ownership to nearly 20 percent, the release said.

Like many banks, Sterling is dealing with balance sheets awash in red ink from collapsing real estate values and construction loan defaults.

Following a 2009 cease-and-desist order from the Washington Department of Financial Institutions, regulators required Sterling to raise millions as sufficient reserves to handle future loan losses. That number has now increased to $720 million, which includes the $135 million investment by THL.

Sterling Executive Vice President David Brukardt said Tuesday the bank has no absolute deadline by which it has to complete the recapitalization.

As a reminder of its financial distress, Sterling reported first-quarter losses Tuesday of $88.8 million, or $1.71 per common share. That compares with first-quarter 2009 losses of $24.8 million, or 48 cents per share. It was an improvement, though, over fourth-quarter 2009 results, when Sterling lost about $333 million.

Company officials discussed the earnings in a conference call but did not take questions from analysts. Brukardt said Sterling cannot disclose in detail its efforts to find more cash.

“We have a plan, but we are not at liberty to provide any specifics,” he said.

Hoover’s, a business-information clearinghouse, notes THL’s reputation for working cooperatively with companies it invests in or takes over.

THL has invested in a wide range of businesses, including a handful of financial service companies. It has taken majority shares in the Nielsen Company and Dunkin’ Brands, the parent of Dunkin’ Donuts and Baskin-Robbins.

Normally, Sterling shareholders would have to vote on the equity deal with THL. But Sterling obtained an exemption that allows the deal to take place because a delay could “seriously jeopardize” the bank’s viability, the news release noted.